Hard Times For The HUI...Until Recently

One of the disappointments of the latest phase of the gold bull market has been the Amex Gold BUGS Index, or the HUI. The HUI hits its high in mid-March of 2008, a little after gold poked its nose up to the $1,035 level. Taken down by the financial crisis like all stocks, the HUI stayed stable between 400 and 475 until late July; at that time, it entered a vicious decline that didn't end until it had hit 150 in late October. Anyone who went bullish at that time got in at the low for HUI, unlike those who went optimistic for stocks in general. Gold got above $1,200 before the HUI matched its March '08 high. As the metal went down, so did the index. Just last week, on Feb. 4th and 5th, the HUI was riding 370.

This chart shows an overall three-year disappointment, which got people asking "where's the leverage?"



Note, though that the RSI index on the top of the chart touched the below-30 oversold level last week. It hasn't done so since November of 2008.

In and of itself, that oversoldness doesn't say much that's bullish. The index also got in the oversold range in early-mid August of '08 and early September. Both of those sub-30s were followed by partial recoveries in the index itself which turned into worse declines.

However, those disappointments were due to the financial crisis wreaking its wrath. There may be another black-swan even of the negative kind, but the only candidate is the so-called PIIGS in Europe. As of now, things look contained in the continent.

Since the index is a basket of unhedged major gold miners, the earnings of the component companies are decisive in the fate of the HUI. That being said, I'd like to pass on a tip from Fred Hickey of the High Tech Strategist: he said that the miners' "all-in" costs were about $900/oz or more last year. That's because of the oft-noted cost squeeze that's bedeviled the major producers.


With gold at four digits, though, these companies can now make a serious profit. That's why Hickey expects the recent run of good earnings news (Randgold, Harmony) to continue. He also notes that input costs are contained right now.


[H/T: the fourth hours of this weeks' Financial Sense Newshour podcast - .mp3 file. High Tech Strategist has no Website.]




Given that the fundamentals seem to be going the HUI's way, for a change, the recent upturn in the index may be portentous. The chart of the HUI:Gold ratio looks awful -



- but at some point, it's indicative of the stocks being at bargain levels relative to gold.